Demand and-supply

Supply andSupply and
DemandDemand
How MarketsHow Markets
Work?Work?
Faculty of Business and Economics, The IIPM, NewFaculty of Business and Economics, The IIPM, New
DelhiDelhi

Faculty of Business and Economics (FBE), The IIPM, New Delhi
Demand and Supply AnalysisDemand and Supply Analysis
“You cannot teach a parrot to
be an economist simply by
teaching it to say ‘supply’
and ‘demand’.”
---Anonymous
“You cannot teach a parrot to
be an economist simply by
teaching it to say ‘supply’
and ‘demand’.”
---Anonymous

In this chapter you will…In this chapter you will…
Learn the nature of a ‘competitiveLearn the nature of a ‘competitive
market’.market’.
Examine what determines the demandExamine what determines the demand
for a good in a competitive market.for a good in a competitive market.
Examine what determines the supplyExamine what determines the supply
of a good in a competitive market.of a good in a competitive market.
See how supply and demand togetherSee how supply and demand together
set the price of a good and theset the price of a good and the
quantity sold.quantity sold.
Consider the key role of prices inConsider the key role of prices in
allocating scarce resources.allocating scarce resources.

THE MARKET FORCES OF SUPPLYTHE MARKET FORCES OF SUPPLY
AND DEMANDAND DEMAND
 Supply and Demand are theSupply and Demand are the
two words that economists usetwo words that economists use
most often.most often.
 Supply and Demand are theSupply and Demand are the
forces that make marketforces that make market
economies work!economies work!
 Modern microeconomics isModern microeconomics is
about supply, demand, andabout supply, demand, and
market equilibrium.market equilibrium.

MARKETS AND COMPETITIONMARKETS AND COMPETITION
• The terms supply and demandThe terms supply and demand
refer to the behaviour ofrefer to the behaviour of
people......as they interactpeople......as they interact
with one another in markets.with one another in markets.
• A market is a group ofA market is a group of
buyers and sellers of abuyers and sellers of a
particular good or service.particular good or service.
• Buyers determine demand...Buyers determine demand...
• Sellers determine supply…Sellers determine supply…

Competitive MarketsCompetitive Markets
A Competitive Market is aA Competitive Market is a
market with many buyers andmarket with many buyers and
sellers so that each has asellers so that each has a
negligible impact on the marketnegligible impact on the market
price.price.

Competition: Perfect orCompetition: Perfect or
OtherwiseOtherwise
 Perfectly Competitive:
 Homogeneous Products
 Buyers and Sellers are Price Takers
 Monopoly:
 One Seller, controls price
 Oligopoly:
 Few Sellers, not aggressive
competition
 Monopolistic Competition:
 Many Sellers, differentiated products
 Perfectly Competitive:
 Homogeneous Products
 Buyers and Sellers are Price Takers
 Monopoly:
 One Seller, controls price
 Oligopoly:
 Few Sellers, not aggressive
competition
 Monopolistic Competition:
 Many Sellers, differentiated products

DEMANDDEMAND
• Quantity Demanded refers to
the amount (quantity) of a
good that buyers are willing
to purchase at alternative
prices for a given period.
• Quantity Demanded refers to
the amount (quantity) of a
good that buyers are willing
to purchase at alternative

Determinants of DemandDeterminants of Demand
• What factors determine how much
ice cream you will buy?
you will really purchase?
Product’s Own Price
Consumer Income
Prices of Related Goods
Tastes
Expectations
Number of Consumers
ice cream you will buy?
you will really purchase?
Consumer Income
Prices of Related Goods
Tastes
Expectations
Number of Consumers

PricePrice
Law of Demand
– The law of demand states that,
other things equal (ceteris
paribus), the quantity demanded
of a good falls when the price
of the good rises.
Law of Demand
– The law of demand states that,
other things equal (ceteris
paribus), the quantity demanded
of a good falls when the price
of the good rises.

IncomeIncome
– As income increases, the
demand for a normal good will
increase.
demand for an inferior good
will decrease.
demand for a normal good will
increase.
demand for an inferior good
will decrease.

Prices of Related GoodsPrices of Related Goods
– Prices of Related Goods
– When a fall in the price of one
good reduces the demand for
another good, the two goods are
called substitutes.
good increases the demand for
called complements.
– Prices of Related Goods
good reduces the demand for
called substitutes.
good increases the demand for
called complements.

OthersOthers
– Tastes & preferences
– Expectations
– Re-saleability
– Advertising
– Tastes & preferences
– Expectations
– Re-saleability
– Advertising

The Demand Schedule and theThe Demand Schedule and the
Demand CurveDemand Curve
– The demand schedule is a table
that shows the relationship
between the price of the good and
the quantity demanded.
– The demand curve is a graph of
the relationship between the
price of a good and the quantity
demanded.
– Ceteris Paribus: “Other thing
being equal”
– The demand schedule is a table
the quantity demanded.
– The demand curve is a graph of
demanded.
– Ceteris Paribus: “Other thing
being equal”

Table 4-1:Table 4-1: Catherine’s Demand Schedule
03.00
22.50
42.00
61.50
81.00
100.50
120.00
Quantity of
cones Demanded
Price of Ice-
cream Cone ($)

Figure 4-1:: Catherine’s Demand Curve
Price of Ice-
Cream
Cone
Quantity of
Ice-Cream
Cones
2 4 6 8 10 120
$3.00
2.50
2.00
1.50
1.00
0.50

Market Demand ScheduleMarket Demand Schedule
• Market demand is the sum of all
individual demands at each
possible price.
• Graphically, individual demand
curves are summed horizontally to
obtain the market demand curve.
• Assume the ice cream market has
two buyers as follows…
• Market demand is the sum of all
individual demands at each
possible price.
• Graphically, individual demand
curves are summed horizontally to
obtain the market demand curve.
• Assume the ice cream market has
two buyers as follows…

03.00
100.50
120.00
Catherine
Price of Ice-
cream Cone ($)
Table 4-2: Market demand asTable 4-2: Market demand as
the Sum of Individual Demandsthe Sum of Individual Demands
+
1
6
7
Nicholas
1
22.50
42.00
61.50
81.00
2
3
4
5
4
7
10
13
16
19
Market
=

Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
D3
D1
D2
Decrease
in
demand
Increas
e in
demand
Figure 4-3: Shifts in theFigure 4-3: Shifts in the
Demand CurveDemand Curve

Table 4-3: The DeterminantsTable 4-3: The Determinants
of Quantity Demandedof Quantity Demanded

Shifts in the Demand Curve
versus Movements Along the
Demand Curve

Price of
Cigarette
s, per
Pack.
Number of
Cigarettes Smoked
per Day
D2
A policy to
discourage smoking
shifts the demand
curve to the left.
0 20
$2.00
D1
A
10
B
Figure 4-4 a): A Shifts in the
Demand Curve

Price of
Cigarette
s, per
Pack.
Number of
Cigarettes Smoked
per Day
0 20
$2.00
D1
A
A tax that raises
the price of
cigarettes results
in a movements along
the demand curve.
C
12
$4.00
Figure 4-4 b): A Movement Along the
Demand Curve

SUPPLY
• Quantity Supplied refers to the
amount (quantity) of a good that
sellers are willing to make
available for sale at alternative
• Quantity Supplied refers to the
amount (quantity) of a good that
sellers are willing to make
available for sale at alternative

Determinants of SupplyDeterminants of Supply
ice cream you are willing to
offer or produce?
Input prices
Technology
Expectations
Number of sellers
ice cream you are willing to
offer or produce?
Input prices
Technology
Expectations
Number of sellers

PricePrice
Law of Supply
– The law of supply states that,
other things equal, the
quantity supplied of a good
rises when the price of the
good rises.
Law of Supply
– The law of supply states that,
other things equal, the
quantity supplied of a good
rises when the price of the
good rises.

The Supply Schedule and theThe Supply Schedule and the
Supply CurveSupply Curve
 The supply schedule is a table
the quantity supplied.
 The supply curve is a graph of
supplied.
 Ceteris Paribus: “Other thing
being equal”
 The supply schedule is a table
the quantity supplied.
 The supply curve is a graph of
supplied.
 Ceteris Paribus: “Other thing
being equal”

Table 4-4: Ben’s Supply Schedule
53.00
42.50
32.00
21.50
11.00
00.50
00.00
Quantity of
cones Supplied
Price of Ice-
cream Cone ($)

Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
6 8 10 120 2
1.50
1.00
1
2.00
3 4
$3.00
2.50
5
0.50
Figure 4-5:: Ben’s Supply Curve

Market Supply ScheduleMarket Supply Schedule
• Market supply is the sum of all
individual supplies at each possible
price.
• Graphically, individual supply curves
are summed horizontally to obtain the
market demand curve.
• Assume the ice cream market has two
suppliers as follows…
• Market supply is the sum of all
individual supplies at each possible
price.
• Graphically, individual supply curves
are summed horizontally to obtain the
market demand curve.
• Assume the ice cream market has two
suppliers as follows…

53.00
00.50
00.00
Ben
Price of Ice-
cream Cone ($)
Table 4-5: Market supply as the SumTable 4-5: Market supply as the Sum
of Individual Suppliesof Individual Supplies
+
8
0
0
Nicholas
13
42.50
32.00
21.50
11.00
6
4
2
0
10
7
4
1
0
0
Market
=

Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
S3
S2
S1
Decrease
in supply
Increase
in supply
Figure 4-7: Shifts in the SupplyFigure 4-7: Shifts in the Supply
CurveCurve

Table 4-6: The Determinants ofTable 4-6: The Determinants of
Quantity SuppliedQuantity Supplied

SUPPLY AND DEMAND TOGETHERSUPPLY AND DEMAND TOGETHER
• Equilibrium refers to a situation in
which the price has reached the level
where quantity supplied equals quantity
demanded.
• Equilibrium refers to a situation in
which the price has reached the level
where quantity supplied equals quantity
demanded.

EquilibriumEquilibrium
• Equilibrium Price
– The price that balances quantity
supplied and quantity demanded.
– On a graph, it is the price at which
the supply and demand curves
intersect.
• Equilibrium Quantity
– The quantity supplied and the
quantity demanded at the equilibrium
price.
– On a graph it is the quantity at
which the supply and demand curves
intersect.
• Equilibrium Price
– The price that balances quantity
supplied and quantity demanded.
– On a graph, it is the price at which
the supply and demand curves
intersect.
• Equilibrium Quantity
– The quantity supplied and the
quantity demanded at the equilibrium
price.
– On a graph it is the quantity at
which the supply and demand curves
intersect.

At $2.00, the quantity
demanded is equal to the
quantity supplied!
Demand Schedule Supply Schedule

Equilibrium
price
Demand
Supply
$2.00
6 8 100
Equilibri
um
Equilibrium
quantity
Quantity of Ice-
Cream Cones
Price of
Ice-Cream
Cone
421 3 5 7 9 11
Figure 4-8: The Equilibrium ofFigure 4-8: The Equilibrium of
Supply and DemandSupply and Demand

• Surplus
– When price > equilibrium price, then
quantity supplied > quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to
increase sales, thereby moving toward
equilibrium.
• Shortage
– When price < equilibrium price, then
quantity demanded > the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too
many buyers chasing too few goods,
thereby moving toward equilibrium.
• Surplus
– When price > equilibrium price, then
quantity supplied > quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to
increase sales, thereby moving toward
equilibrium.
• Shortage
– When price < equilibrium price, then
quantity demanded > the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too
many buyers chasing too few goods,
thereby moving toward equilibrium.

Demand
Supply
$2.00
6 8 100 Quantity of
Ice-Cream
Cones
Price of
Ice-Cream
Cone
421 3 5 7 9 11
$2.50
Surplus
Quantity
Demanded
Quantity
Supplied
Figure 4-9 a): Excess SupplyFigure 4-9 a): Excess Supply

Demand
Supply
$2.00
6 8 100 Quantity of
Ice-Cream Cone
Price of
Ice-Cream
Cone
421 3 5 7 9 11
$1.50
Shortage
Quantity
Supplied
Quantity
Demanded
Figure 4-9 b): Excess DemandFigure 4-9 b): Excess Demand

Three Steps To AnalyzingThree Steps To Analyzing
Changes in EquilibriumChanges in Equilibrium
• Decide whether the event shifts the
supply or demand curve (or both).
• Decide whether the curve(s) shift(s) to
the left or to the right.
• Use the supply-and-demand diagram to
see how the shift affects equilibrium
price and quantity.
• Example: A Heat Wave
• Decide whether the event shifts the
supply or demand curve (or both).
• Decide whether the curve(s) shift(s) to
the left or to the right.
• Use the supply-and-demand diagram to
see how the shift affects equilibrium
price and quantity.
• Example: A Heat Wave

D1
Supply
$2.00
6 100 Quantity of
Ice-Cream Cone
Price of
Ice-Cream
Cone
421 3 5 7 11
D2
$2.50
1. Hot weather increases the
demand for ice cream…
2. …
resulting in
a higher
price …
3. … and a higher quantity
sold.
New equilibrium
Initial
equilibrium
Figure 4-10: How an IncreaseFigure 4-10: How an Increase
Demand Affects the EquilibriumDemand Affects the Equilibrium

Demand
S1
$2.00
100 Quantity of
Ice-Cream
Cones
Price of
Ice-Cream
Cone
421 3 7 11
S2
$2.50
1. An earthquake reduces the
supply of ice cream…
2. …
resulting in
a higher
price …
3. … and a lower quantity
sold.
New
equilibrium
Initial
equilibrium
Figure 4-11: How a DecreaseFigure 4-11: How a Decrease
Demand Affects the EquilibriumDemand Affects the Equilibrium

D1
S1
0 Quantity of
Ice-Cream Cone
Price of
Ice-Cream
Cone
Q1
D2
Large increase
in demand
P2
S2
Q2
New
equilibrium
Small
decrease in
supply
Initial equilibrium
P1
Figure 4-12 a): A Shift inFigure 4-12 a): A Shift in
Both Supply and DemandBoth Supply and Demand

D1
S1
0 Quantity of
Ice-Cream Cone
Price of
Ice-Cream
Cone
Q1
D2
Large
decrease in
supply
P2
S2
Q2
New
equilibrium
Small increase
in demand
Initial
equilibrium
P1
Figure 4-12 b): A Shift inFigure 4-12 b): A Shift in
Both Supply and DemandBoth Supply and Demand

Table 4-8: What Happens to PriceTable 4-8: What Happens to Price
and Quantity when Supply or Demandand Quantity when Supply or Demand
Shifts?Shifts?

ConcludingConcluding Remarks…Remarks…
• Market economies harness the
forces of supply and demand. . .
• Supply and Demand together
determine the prices of the
economy’s different goods and
services. . .
• Prices in turn are the signals
that guide the allocation of
resources.
• Market economies harness the
forces of supply and demand. . .
• Supply and Demand together
determine the prices of the
economy’s different goods and
services. . .
• Prices in turn are the signals
that guide the allocation of
resources.

SummarySummary
• Economists use the model of
supply and demand to analyze
competitive markets.
• In a competitive market, there
are many buyers and sellers, each
of whom has little or no
influence on the market price.
• Economists use the model of
supply and demand to analyze
competitive markets.
• In a competitive market, there
are many buyers and sellers, each
of whom has little or no
influence on the market price.

SummarySummary
• The demand curve shows how the quantity
of a good depends upon the price.
– According to the law of demand, as
the price of a good falls, the
quantity demanded rises. Therefore,
the demand curve slopes downward.
– In addition to price, other
determinants of how much consumers
want to buy include income, the
prices of complements and
substitutes, tastes, expectations,
and the number of buyers.
– If one of these factors changes, the
demand curve shifts.
• The demand curve shows how the quantity
of a good depends upon the price.
– According to the law of demand, as
the price of a good falls, the
quantity demanded rises. Therefore,
the demand curve slopes downward.
– In addition to price, other
determinants of how much consumers
want to buy include income, the
prices of complements and
substitutes, tastes, expectations,
and the number of buyers.
– If one of these factors changes, the
demand curve shifts.

SummarySummary
The supply curve shows how the quantity
of a good supplied depends upon the
price.
According to the law of supply, as the
price of a good rises, the quantity
supplied rises. Therefore, the
supply curve slopes upward.
In addition to price, other
determinants of how much producers
want to sell include input prices,
technology, expectations, and the
number of sellers.
If one of these factors changes, the
supply curve shifts.
The supply curve shows how the quantity
of a good supplied depends upon the
price.
According to the law of supply, as the
price of a good rises, the quantity
supplied rises. Therefore, the
supply curve slopes upward.
In addition to price, other
determinants of how much producers
want to sell include input prices,
technology, expectations, and the
number of sellers.
If one of these factors changes, the
supply curve shifts.

SummarySummary
• Market equilibrium is
determined by the
intersection of the supply
and demand curves.
• At the equilibrium price, the
quantity demanded equals the
quantity supplied.
• The behavior of buyers and
sellers naturally drives
markets toward their
equilibrium.
• Market equilibrium is
determined by the
intersection of the supply
and demand curves.
• At the equilibrium price, the
quantity demanded equals the
quantity supplied.
• The behavior of buyers and
sellers naturally drives
markets toward their
equilibrium.

AssignmentAssignment

Demand and-supply

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